S&P cuts Spain’s credit rating

Standard & Poor’s(S&P) has cut Spain’s credit rating two notches to BBB+ and warned of more economic pain to come.

It has also placed Spain on negative outlook, meaning there is a risk of further downgrades.

The ratings agency said the country could have to take on more debt to support its banking sector, the BBC reports.

S&P predicts the Spanish economy will shrink by 1.5% this year, having previously forecast 0.3% growth. It also expects the economy to contract 0.5% in 2013, having previously predicted 1% growth.

The ratings agency criticised Europe’s strategy to deal with the crisis: “In our view, the strategy to manage the European sovereign debt crisis continues to lack effectiveness.

“We think credit conditions, and hence the economic outlook for Spain, could now deteriorate further than we anticipated earlier this year unless offsetting eurozone policy measures are implemented to support investor confidence and stabilize capital flows with the rest of the world.”

It suggested such measures could include a pooling of resources and obligations between eurozone countries and policies to harmonise wages across the eurozone.

However, S&P did acknowledge the Spanish government had taken some positive measures to improve the country’s situation.

“Despite the unfavorable economic conditions, we believe that the new government has been front-loading and implementing a comprehensive set of structural reforms, which should support economic growth over the longer term,” S&P said.

“In particular, authorities have implemented a comprehensive reform of the Spanish labour market, which we believe could significantly reduce many of the existing structural rigidities and improve the flexibility in wage setting.”